Q50537b Y Corporations has estimated for a new product that, its BEP is 3000 units, if the items sold at Rs. 14: the variable cost per unit is Rs. 9 and fixed cost per annum is Rs. 15,000. Calculate the degree of operating leverage if sales volume is 4000 units and 5000 units.

Question based on ISTD Solved Assignment and other course

Solution:

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A 25% increase in sales results in 100% change in operating profits i.e. 4 times increment. It clearly shows that increase in profits in comparison of increase in sales due to operating leverage. It shows that a 20% increase in sales will increase the profits by 4 times and 20% reduction in sales volume will reduce the profit by 4 times.

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